June 13, 2014
By Gene Long- Vice President, Industry Supply Chains
In the global marketplace, any product can come from any country of origin. The lexicon of pop culture has certainly been influenced by shifts in countries noted on “made in” labels, noting evolutionary differences in where the majority of consumer goods originate. Popular television programs, movies, and all forms of media have pointed out “made in Hong Kong,” “Made in Taiwan,” and “Made in China” labels over the decades in comedic or social contexts. This reflects just how prolific these labels have been and how noticeable shifts in production centers are.
Though the post-World War II era has seen primary sources of manufacture for North American markets move between individual countries, it has largely remained in the Asia-Pacific region. That’s changing quickly, but Asia will remain a hotbed of production — just not for export.
Rise of the middle class
Many industrial centers of Asia are seeing rapid growth in an emerging middle class, which is demanding goods and service from factories that have traditionally manufactured products destined for export. This rise in local consumption is attracting the attention of multinational companies that originally located in these areas to take advantage of lower production costs, who are now recognizing indigenous populations as consumers more than sources of labor.
As local workers earn more, the cost of production has risen, making the region less attractive as a low cost production center. Profit opportunity is becoming more available to companies that adapt their services and products to the local marketplace than those that continue to produce for transoceanic export. This is similar to the conditions that drove movement of production centers to locales across Asia over the past 70 years, only on a larger scale
Equilibration of global price
Prices for fuel are equalizing across the globe, negating the benefits of procuring it in any one location over another. Effecting all fuels including diesel, Jet A, and marine bunker fuel, this equilibration touches all forms of transportation. It now makes more sense than ever to consider length of carry very highly when planning supply chains. Distance has become a primary factor in the cost of these supply chains and longer hauls are coming with much higher prices, especially on a relative scale
At the same time that fuel prices have equilibrated, the United States has enjoyed a renaissance in manufacturing due in large part to the affordability and availability of domestic natural gas supplies. As long distance supply chains become more expensive, industry investment in North America is becoming cost effective for businesses that have consumer bases here.
Nearshoring for increased profit
The directly proportional relationship between supply chain cost and length of journey combined with the increasing availability of viable markets near manufacturing centers is providing a strong impetus to locate production as close to consumers as possible. Demand side economics dictates the most growth can be expected to occur where consumer bases are growing the fastest: China, India, Brazil, and former Soviet bloc nations.
Existing manufacturing infrastructure provides an extra boost to much of the Asia-Pacific region as this capability piggybacks increased demand, driving even more local production. Increasing localization of sourcing can be expected to help shorten supply chains moving forward, and production centers originally intended to export goods will grow even faster as that infrastructure changes to better serve domestic consumers.
Both North America and Asia stand to benefit from shortened supply chains that locate sourcing facilities closer to end consumers. While more production will originate in North America to avoid overseas journeys, Asia will benefit even more as production there scales to serve growing local markets.
Gene Long is Vice President of Industry Supply Chains at Chainalytics where he provides leadership and insight on logistic strategies for clients on a global scale.